Feeling the Pain in Tehran

As sanctions bite, some of Iran's leaders are signaling a willingness to come back to the negotiating table.

Iran’s Ministry of Intelligence did something remarkable last month: It used its website to publish a report (link in Farsi) calling for direct talks with the country’s foe, the United States. In the report, entitled "The Zionist Regime’s Reasons and Obstacles for Attacking Iran," the traditionally hawkish ministry highlighted the benefits of diplomacy and negotiations with the United States: "One way to fend off a possible war is to resort to diplomacy and to use all international capacities."

The authors took care to draw a line between the approaches currently taken towards Iran’s nuclear program by the U.S. and Israel, Iran’s archenemy. President Obama, the report’s authors wrote, "hopes to solve this issue peacefully and through diplomacy" — in contrast to Israel, which, it said, favors a unilateral strike against Iran’s nuclear facilities. By implementing "severe sanctions," the report contended, Obama is actually trying to control the situation without resorting to military action. The text concluded that there is a high risk of war and "it is an unforgiveable sin not to prevent it."

The Ministry of Intelligence report signals an intriguing shift in the Iranian political landscape. The ministry, a key player in the power structure of the Islamic Republic, could have chosen to use its considerable leverage to influence the debate internally — but instead it chose, in an entirely unprecedented way, to enter a public debate. The man who runs the Ministry of Intelligence, Heydar Moslehi, is no outsider; he is, in fact, a confidant of the supreme religious leader, Ayatollah Ali Khamenei, who has the final word on all matters of state. Ayatollah Khamenei habitually refers to the United States as "the enemy" and has denounced negotiations.

"The report shows that there is still space in the Iranian system for more pragmatic, nationalistic voices to publicly float ideas in favor of solutions to the U.S.-Iran conflict," said Reza Marashi, Director of Research at the National Iranian American Council, a Washington-based advocacy group. "By publishing its report online, Iran’s Intelligence Ministry has taken a step to take a subtle shot at inflexible hardliners who could raise the cost of pursuing peace."

The most likely reason for the shift is the dire state of Iran’s economy. International sanctions leveled against the country because of its nuclear program are having a devastating effect. Inflation is soaring, sparking worries among ordinary people and government officials alike. Demonstrations rocked Tehran’s bazaar in October after the Iranian currency, the rial, collapsed 40 percent against the U.S. dollar. Local newspapers are filled with daily reports on the effects of skyrocketing prices around the country.

The European Union and the United States have enforced crippling sanctions in recent months. (The latest round of EU sanctions just came into effect on December 22.) The measures have led to a sharp decline in Iran’s oil revenues. European countries that used to buy 20 percent of Iran’s oil have suspended their imports since July. Other countries, such as China and India, have sharply reduced their imports under pressure from the international community. An embargo on the Iranian financial sector blocks its banking system from transferring money. American and European firms, fearing hefty fines, refuse to do business with Iran. U.S. authorities have levied hundreds of millions of dollars in fines against Standard Chartered Bank and HSBC for moving Iranian money through the U.S. financial system.

The assumption in the West is that economic pressure will convince Iranian leaders to bow to the international community and suspend the country’s controversial nuclear program. Iran has so far refused to comply with international demands to suspend its uranium enrichment program. Last month, the International Atomic Energy Agency, the United Nations watchdog that supervises Iran’s program, reported that Tehran continues to defy international demands by enriching uranium to a grade of 20 percent — a level that Iran can more easily convert to weapons-grade uranium. At one bunker facility, Iran has also installed more modern centrifuges to enrich uranium faster, the report said. Israel, the United States, and some western countries accuse Iran of having a clandestine weapons program. Iran strenuously denies those charges, saying that its program is strictly for peaceful purposes.

Israel has threatened to launch a military strike against Iran’s nuclear facilities before the program reaches a sensitive stage. There are fears that Israel will drag the United States into the war, even though President Obama has said that he wants to exhaust all diplomatic channels first. Iran has vowed to retaliate if it comes under attack.

Iran and the United States severed diplomatic ties in 1979 after Islamist students stormed the U.S. embassy in Tehran and took 52 diplomats hostage for 444 days. Despite Ayatollah Khamenei’s opposition, many more are voicing concerns that the nuclear dilemma won’t be settled before Iran and the United States engage in direct talks. President Mahmoud Ahmadinejad said last month that the dispute over the nuclear program has become "politicized" and "should be resolved by direct talks between Iran and the United States."

There are other signs that pressure is building among powerful lobbies close to Khamenei. Mohammad Javad Larijani, secretary of Iran’s High Council for Human Rights, who is also close to the Supreme Leader, said recently in a televised interview that Iran and the U.S. need to deal directly. "To protect the interests of our system, we would negotiate with the U.S. or anyone else even in the abyss of hell," he said.

Iran’s economy is expected to suffer one of its worst contractions. The Economist Intelligence Unit, a London-based think-tank, estimates that it will shrink to $70 billion this year from $80 billion in 2011. Inflation is galloping at 25 percent, according to the International Monetary Fund. The rial has lost 300 percent of its value over the past year.

Putting food on the table has become a challenge for many Iranians. Shirin, a 34-year-old single chemist who lives with her widowed mother in Tehran, said that the rial’s drastic loss of value — 40 percent since August alone — is making life far harder. "Cabbies ask for a higher fare every morning when I go to work, citing the higher exchange rate," she said. "We’ve had to cut down on what we eat and replace, for example, meat with more bread. But how long can we continue doing that?"

Faced with a swelling budget deficit, the government has failed to pay private contractors. Heads of several private hospitals warned this month that their hospitals were in verge of bankruptcy because the government was not paying what it owed them. A 15-year old hemophiliac boy died in the southern city of Dezful after his parents couldn’t find the vital medicine he needed, a state news agency reported. His is the first civilian death directly linked to the sanctions.

Humanitarian items such as food and medicine are not listed under the sanctions. But the lack of funds and the shortage of foreign currency mean that Iran is struggling to import them, triggering a major health care crisis. (The image above shows a woman buying medicine in a Tehran pharmacy.)

"The situation will get worst than you can imagine," said a Tehran-based economist who spoke on condition of anonymity for fear of retribution. "Inflation feels like 50 percent. This is already affecting the healthcare, education, and social security in addition to production of all kinds of goods. Even if the sanctions are lifted tomorrow, it will take a long time to fix the damage that has already been inflicted."

The current hardship feels especially severe since it follows a period of economic prosperity. In 2005, oil prices topped $100 a barrel, triggering unprecedented windfall revenues for the Iranian state. $531 billion poured into state coffers in the years following — roughly half the entire amount earned by Iran from its oil reserves since petroleum was first discovered in the early twentieth century. Ahmadinejad did his best to spread the wealth through government entitlements. The poverty level dropped from 40 percent in 2002 to 18 percent in 2007, enabling the population to spend on Chinese goods imported with petrodollars. But now poverty is on the rise again. Ahmadinejad announced in a televised address in October that the Foreign Currency Reserve, the account set up for rainy days, had reached an all-time low.

Starting on October 15, the EU banned the export of metals like aluminum and steel to Iran. Given steel’s central role in the economy, the disruption in supply is causing wide-ranging problems. Construction workers across the country have suspended work due to a shortage of steel, newspapers have reported. In addition, car manufacturing, previously one of the country’s most robust industries, has dropped by more than 60 percent.

"Iran is losing its modern sector," said Djavad Salehi Isfahani, professor of economics at University of Virginia. "It is the creative and innovative Iran that is collapsing because it cannot attract technology and investment."

No one expects the sanctions to lead to a complete collapse of the Iranian economy. The regime still receives enough funds from the sale of oil (both legal and illegal) to keep going. "The economy will limp along," said Kamran Dadkhah, an associate professor of economics at Northeastern University in Boston. "Life will become more difficult, especially for those who have a fixed income, but the roof will not come down."

Yet frustration continues to build. Factories are being forced to shut down for lack of capital and raw materials. Workers are staging regular protests due to lay-offs or interruptions in salary payments. Public complaints by industrialists suggest that they are not willing to embrace austerity.

Some analysts compare Iran’s ten-year effort to build its nuclear program with its dogged conduct in its bloody, eight-year war with Iraq in the 1980s. Back then, the founder of the Islamic Revolution, Ayatollah Ruhollah Khomeini, wanted to defy the West and show the strength of his nation by continuing the fight against Saddam Hussein. In 1988, under pressure from close aides and a society devastated by the war, Khomeini finally agreed to accept a ceasefire. He compared it with "drinking the cup of poison."

There is no sign yet that Ayatollah Khamenei might be willing to drink a similar cup of poison and settle for a compromise over the nuclear program. He has repeatedly dismissed the effects of the sanctions. But a few weeks ago he called them "savage," acknowledging indirectly, for the first time, that they were hurting the country.

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Feeling the Pain in Tehran

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